What does RDR mean for platforms?

The FSA’s industry wide consultation on platform regulation is expected to have a wide impact with an estimated 98 per cent of advisers using platforms and £135 Billion of assets already held on platforms. So how will the FSA’s platform regulations affect you?

We have lined up three key industry experts to look at the impact on platforms and answer your questions about the new regulations, which will come into effect at the end of 2012.

The requirements of RDR are likely to push intermediaries even more towards platforms. So the FSA’s recommendations for regulating the myriad of platforms are expected to have a wide impact on the implementation of restricted advice and independent advice business models. The complexity of the review led to several delays in its publication. The industry appeared divided over the key issues of adviser charging, fund manager rebates and transparency.

Has the FSA resolved the debate or will it spark more lobbying and regulatory uncertainty? If the latest FSA recommendation turns out to be a compromise could there be further change ahead? And should advisers continue to embed platform technology in their businesses to drive efficiency in the run up to RDR?

Log onto our live WebTV show with Hugo Thorman - Managing Director at Wrap Platform Ascentric, Danny Wynn – RDR and Commercial Director at Legal & General and Alastair Conway – Sales and Marketing Director at Cofunds Funds Platform as they answer your questions about what the new regulations mean for your business from January 2013.

Hugo Thorman, Danny Wynn and Alastair Conway join us live online at www.studiotalk.tv on 14th December 2010 at 2pm to discuss RDR

H: With the retail distribution review consultation process on the way, changes are on the horizon.

Titles

H: Hello and welcome to The Business Show. I’m Jayne Constantinis. The FSA’s industry wide consultation on platform regulation will have a wide impact on advisor businesses. With an estimated 98% of advisors using platforms and £135 billion worth of assets already held on platforms. So how will the FSA’s proposals on regulation post RDR affect you? Well joining me to discuss this is Hugo Thorman, Managing Director at Wrap Platform, Accentric, Danny Wynn, RDR and Commercial Director at Legal and General, and Alistair Conway, Sales and Marketing Director at Cofunds. Thank you, gentlemen for joining me today. Coming up on the show, we discuss the cash rebate, re-registration, voting rights and your FAQs. So if we could begin the debate, Hugo, I’d like to ask you to tell us what you think about the FSA’s latest position on rebates.

A: Well, specifically, I’m going to take this as the cash rebate and their proposal to ban cash rebates. I mean, first of all it’s a bit of shocker, I have to say, we weren’t expecting it at all, we can’t understand the problem that they’re trying to address by doing it, because obviously what we feel is that by paying cash rebates to the client account, which is the way we do it at the moment, is completely transparent, so that the client can see rebate the net charge there for paying for the fund, exactly how much they’re paying for the platform and how much they’re paying advisor, so we thought that was the perfect solution, we thought the FSA would opt for that, and so we’re very alarmed at the proposal to do away with that and the alternatives that are being proposed, which is to credit units, primarily, or to a different share class which has it’s own issues but the first solution to credit units is fraught with all sorts of difficulties of actually keeping track of those units and the CGT implications in a non-taxed account especially.

B: Yeah, Jayne, I think I pick up on Hugh’s point, it’s around the issue of just giving all the end point information to the investor so advisors sitting there trying to explain for example, a load of SWOR transactions going into say 15 funds that somebody may hold, and I think the regulator correctly is trying to get to the position where the investor understands what’s being charged to them and what the effect is on their investments etc., but my experience is that the more you bombard people – and we’ll probably come back to this theme quite a few times – with lots and lots of information, perpetuating into lots of statements of information and breaking down, the danger is we put people off, rather than encourage them. The regulator, I think, is motivated by trying to make things clearer to people and easier to understand, we might find the unintended consequence here is that it does quite the reverse.

C: I think what we’re already seeing is a slight lack of understanding from the regulator on how this would play out. Because I think from their point of view, they’re thinking we’ve got quite a neat solution here, because it’s exactly the same as the life offices with life products, where as a life provider, we can go and negotiate a rebate with a fund manager, and then reflect that in our pricing and the customer still gets one neat price. On the platform world, that just wouldn’t happen. Like you say, customers would see lots of these tiny transactions and it gets confusing, and I’m just not sure the regulator have seen that – how it will actually play out in practice.

H: But there’s an industry wide consultation on this. Why aren’t you guys speaking up and telling the regulator that this is what’s going to happen in practice?

B: Well, I think we are, Jayne, to be honest. I think it’s incumbent on us and all the others to go on articulating, and I think the important thing is that my sense is that the industry has got comfortable with the fact that the world needs to change. That actually empowering investors and making sure that they understand what’s going on is a good thing, rather than a bad thing and good IFA’s I think are no longer frightened by this. I think they’ve gained some confidence over the last few years about the whole issue of RDR and some of the consequences. So I think the industry’s in a better place to have the dialogue and my urge to the FSA would be to allow some of the other changes, and the good parts of RDR to begin to permeate into the market. And if, ultimately, the cash rebates need to be addressed, maybe that’s something we look at 3 or 4 years down the road, where we’ve seen how a world where cash rebates are allowed plays out, and then if it needs to evolve further, we need a bit more granularity, that’s fine. But there’s a slight danger here we’ll change so many things in one go, we won’t get the underlying benefits of RDR that I think we all think are good.

A: I was going to say, I think that’s a great solution Alistair, but we do have to just think about what it was that they were trying to achieve by doing this, and as we read it in the documentation, it’s apparent encouragement for an advisor to offset the rebate against their advisor charge, which we had never heard about, I have to say, and I’ve obviously consulted the other WRAP Platforms and they were completely nonplussed as well. They couldn’t understand why that had been put forward and of course this doesn’t resolve it either, because equally a rebate paid in units, or in fact a lower value share class would achieve the same objectives if that was explained as an offset, so we don’t think they’ve actually achieved what they wanted to achieve, so I think what we must do is go back to the regulator and find out exactly what is was they were trying to achieve, and I haven’t quite got that yet.

B: Yes. One of the things that came out, and we were talking about this earlier, is where the regulator started with their thinking here was the concern that typically trial commissions on funds is around 50 basis points, and then if you had a rebate occurring and then an explicit charge from an advisor and the two happened at the same time, it looked as though the fund manager was paying the cost and I think that the regulator is concerned that it’s not explicit. There’s a charge that could be avoided if the advisor didn’t make a charge, so the rebate occurs, the advisor doesn’t have to charge the same amount, or anything for their services if they don’t want to. There needs to be a reason why they are making that charge. But I think – I still believe, that good disclosure can solve that problem, rather than the engineering that we’re talking about in terms of buying loads of small units. I’m not sure that that will make it any clearer to an investor.

C: You just have this nagging doubt about whether the FSA will actually buy just a better disclosure solution. I think they’ve got themselves wound up that there’s a real problem here to solve, rightly or wrongly, and I think they feel they need to solve it through regulation, not just through disclosure.

B: I hope I’m wrong. But that goes back to my point earlier. I think there’s so many aspects of what’s occurring with the RDR changes, I think however we end up with the advisors reaching a certain level of qualification, around explaining the more explicitly the charges and the services being offered, if those benefits can be allowed to permeate into the market, then go back and look and check with the investors about whether or not they’ve achieved either ambition, and then two years, let’s say, down the road saying, do we need to tighten things up a little bit and tweak things, that would be feel more likely, I think, to get a better outcome over a ten year period, than over engineering everything, where we end up with a scenario where, it’s not quite right but we’re not quite sure which bit didn’t work. And then you end up with a whole new load of regulation, and a frustrated regulator because they didn’t get the outcome they wanted and an industry going, don’t change it again. Because ultimately, if you look at where the advisor market is heading compared with where it was ten years ago, I think it’s moved forward leaps and bounds. I think platforms have helped with that environment, I think product providers are beginning to move into the world that we’re all operating in so that we’ve got a whole world where I think the end investor is going to get a better outcome, much more choice. There’s so many good things there that it would be a shame that this sort of issue ended up being one of the things that held it back.

H: But is that likely to happen, this…you talk about this tweaking, 3 or 4 years down the line. Once the changes and the new regulations are in place, are they likely to go back and unpick some of it?

C: I think more to the point, the current regulator knows that it probably won’t be around in 3 or 4 years time, they’re trying to get it right, they want to do it now. I’m not sure that they’re…I can’t speak for them directly, but I’m not sure that they are confident enough to take this wait and see approach, given that it might be some of the same of the people, but that this won’t be there

A: But Danny, if they’re not confident enough that this proposal is…if they’re confident enough that this proposal is required, I can tell you that they really shouldn’t yet be confident of the consequences of what they’ve detected

C: Absolutely

A: Because I can tell you that if you actually start playing through, which is what we’re doing now, what a customer statements are going to look like, with a number of additional units that have to be added and then units that are going to be deducted, then the implications for CGT – all of this has to be put in front of their accountant don’t forget, and then the HRMC are going to in the end, see the results of all this, I really don’ think that that’s been considered. So if that’s an alternative, if that’s an alternative to letting it run for 4 years, just to see how the current regime works, then I think I might prefer that.

C: I’m not saying it’s the right approach – I’m trying to understand where the motivations are

B: Just to think just to articulate it all out loud, just take the point that Hugo’s just made about the statements…someone’s got 15 different holdings of unit trusts. They then have to…the trail then gets rebated back in, they buy units in each of those 15, the day after, the advisor takes his monthly fee, strips back out the same percentage, or annual fee, they’ll be 30 transactions that have achieved absolutely nothing except the CGT event

A: And then what do you do with it?

B: And then it goes up. All of that activity, cost incurred throughout, a piece of paper for each of those, because that will probably cover a sheet

A: We heard another one the other day, supposing you sell out of a unit holding altogether, and then the rebate comes through a month later, you’ve got a tiny 2.3 units, they’re sitting there. Who’s going to pay for the client to sell those?

B: Correct

A: The client sells to me, he gets a charge for selling them and nobody’s added anything, the customer detriment is very large in all of this

H: I want to jump in here actually for a second if I may and take a question that’s come in that’s pertinent to this debate. Richard Anderson has said, “Why don’t we stop all rebates etc. and simply have lower AMC’s, so that we have complete transparency and a level playing field?”

B: Well one of the options for the market would be for the fund groups to bring in, let’s say – and let’s keep the numbers simple and assume a trail is simply 50 basis points, on 150 base point type unit, then that could come down to 100, and that would remove the need. Now, there’s a couple of issues that come out of that. Number 1, it would need everybody to go down that route. Now, I think for some of the larger groups that might be possible, for some of the smaller groups that might be a level of cost for the fund groups that they do honour in care. We then we get the debate of, someone’s in a 150 group basis class because that’s what they’ve bought 3 years ago, they want to be moved to another share platform and it’s 100 basis points share class in the new platform. So, whilst in simplistic terms, I think that does potentially provide a way through the problem, there’s all sorts of other little consequences that come out of it, so the rebate method into a cash account, whilst it has…it isn’t ideal sometimes, because it can be messy, is I think probably the most pragmatic way of resolving the problem or I can equally see why we would end up with 100 base point share price. I think that’s one of the debates to run and run. I don’t think a lot of groups will make a decision before the final rules arrive.

A: It’s interesting, because I’d like to know whether they would all move 100. Definitely as far as B to C platforms are concerned they’re going to keep to 150 of course, so if we went down to 100 they’re going to complain like crazy, because they don’t want…we’ve got no idea of the 50 they’ve just lost

B: But we would have to…we’ve got a lot of B to C executionary type customers, we would absolutely have to keep that in play

A: So that’s 2 straight away

C: I suspect the fund managers will feel a lot of pressure from their regulator even to drop down to 100 share class, because with commission going, they’re saying actually we’re not paying commission anymore, we’re paying a rebate. I think it’s a hard place to defend. I understand why for execution only business….yeah, currently execution only businesses are receiving probably round about 70 bips, maybe a little bit more, so 50 bip commission, plus a rebate and all of a sudden they see their revenue cut by a third if it’s a 100 bip share class, but as a fund manager, the FSA have introduced measures to remove commission out of the equation, you’ve fought tooth and nail, really hard to keep rebates, as we know rebates today, not the commission but the rebate element, so then to say well, we’ve got all of that but we’re not going to drop our prices, even though commission’s taken out of the equation feels a bit untenable, and as a fund manager, you’re going to feel under real pressure to drop your prices down to 100.

A: Accept this too – there’s 100 and there’s a 150, what are we going to do about re-registration? I mean, I don’t think it’s been considered. Because there’s the administration costs of running 2 share classes, which I think most will, if that’s right, so must fund managers have 2 share classes and that’s double the reconciliations for the platforms, that’s double the amount of work – well, not double, we like to say it’s double for the TA’s and that means the charges will go up for administering the funds, as well as the platforms, and then when it comes to re-registration that’s going to increase the charges we’re going to incur in re-registering from 150 units to 100 units. And of course again the fund managers are going to have conduct the re-registrations regularly from one nominee to another.

C: I think if you take a step back and look at where some of the pressure I think fund managers are feeling, because they know where the FSA’s mind is on some of this – in the UK, consumers are paying higher TER’s than anywhere else in Europe, and certainly more than – much, much more than they’re paying in America, for like for like funds, forget the fact that there’s different passive active mixes elsewhere in the world, for like for like funds, UK consumers are paying much higher TER’s, fund managers are feeling under a bit of pressure here. The FSA is saying, right, commission is gone for advised business; it’s pretty hard for a fund manager to defend not taking it out of their retail price. I do understand, deeply, the administration issues

B: What you’ve just described and the comparison with the rest of Europe, that isn’t creating pressure on the fund manager in terms of a competitive environment, in terms of their charges for the fund management. What we’re talking about here is taking away the 50 basis points trial and then having the explicit charge from the advisor, so the advisor’s now in a world where the regulator has created, I can compare what I get charged by an advisor over here, with what I get charged with an advisor over there or going executionary, whatever comparison the consumer wants to make. What none of that you’ve just described actually changes, is competitive pressures on fund management fees for the actual asset management

A: It’s still 100 isn’t it?

B: It’s still 100, and that’s I think, another area where the regulator does want to see pressures and I don’t think any of the things that we’ve talked about in either consultation or discussion paper, coming to that issue. And to your point about those higher charges, the only place that’s creating competition there, is in the environment of ATF’s beginning to create pressure in comparing actively managed fund with passive funs

C: I absolutely accept that there’s nothing in these proposals that will cause, or drive price competition between fund managers and I’m not defending that at all. I’m just trying to analyse the situation and say what are the motivations here, and I think as a fund manager, which we are, it doesn’t feel like a particularly strong and safe position to be in if you’re trying to defend your lot, which everyone in lobbies does, to say to the regulator, you’ve stripped out the price of commission first, we can’t pay commission anymore, but we’re not dropping our prices. We’re going to effectively continue doing our own thing, we’re just going to pay it back in a different way and I know that doesn’t feel like a particularly tenable position to be in, as a fund manager.

A: Well, I think it’s got to be a good outcome if there’s more competition and prices actually reduce, but as Alastair says, if you move from 150 to 100, you haven’t actually achieve anything, because you’re just going round the deckchairs. The 100 needs to come to 95 for some, 92 for others, so there is some genuine price competition, but it’s transparency that generates price competition, isn’t it?

C: If you go on that release, you get to an outright ban on rebates

H: Let me just jump in here with a comment – sorry Alistair we’ll come back to you in just a second on that. Steve Lunn has been prompted to write in and say “Will the FSA insist on agreed fees being added to charges included in illustrations where lower annual management charge funds are used? This seems necessary to have a level playing field”.

C: We’re still waiting on the proposals from the FSA on disclosure of reverse charges. It would be unsurprising if that’s what the FSA want to do, but it’s looking entirely possible that laws coming out of Europe may prevent them from forcing us to bundle up one disclosure that has both the full effect of product and platform and advice charges on the investment and if it does fall to anyone’s responsibility, it may be that it falls to the responsibility of the advisor to produce that albeit with the help of quote tills on platforms, from the back office, from providers

B: It does open up the question about this whole challenge about making explaining to the investor, exactly what they’re getting in exchange for the services, so I’ve always been keen to this concept of this page of costs here, and a page of what you get in return for that, it’s a simple document, and it’s enough for people to digest, to know what they’re going to get, they want some more information they can go and get it, but we don’t bombard them and back to what we were talking about earlier about statements being very long etc, my experience in my advising days, once you get beyond two pieces of paper, for most investors, they get turned off, and I think the whole purpose of the retail distribution review was to get the industry engaging in the right way with the end investor, so they wanted more to engage with products, engage with savings and protect themselves as they get older and with life events. The moment we start deterring them and turning people off, frankly we’ll all be talking to ourselves

H: Too much transparency can be counterproductive, can’t it? Can I just bring you back to re-registration and ask you this. Will Wraps and Platforms deliver re-registration in line with proposed turnaround time suggested by the FSA, end of 2012. What are your thoughts on that Hugo?

A: Well, there’s I think a working group that’s got good traction, everybody’s signed up to, I feel very confident that everything will certainly be there. It’s actually quite a long time for that. It’s not…we’ve been thinking about it for quite some time about how we’d make it as an industry and how we’d actually make it happen and I think that the regulator did a service for the industry by actually giving us a target date to go for at the end of 2012 and I think we’ll make to be honest. There are new providers emerging who are going to facilitate the whole thing for all, I think Alistair will agree, for the whole industry, so I feel quite confident. But it won’t help if there’s multiple share classes. That’s just going to make it harder.

B: I would agree with that. I think there’s a real determination, I think there was cynicism amongst the advisor community if you go back 6 or 12 months that really anybody wanting to do it. I think there was some genuine voices including ours and including Hugo’s who didn’t want to see that happen and I think that there’s nothing like a deadline but you’re right, if it gets overly complicated before the deadline, I can see us all getting into rooms with regulator going look we’re trying get there, but now it’s all got so complicated, you can see how the time will go out. I think the other key ingredient there, is the fund groups being engaged and actively participating in the process, because if you go back to Hugo’s point earlier about the 150 basis point share class, we’re going to need co-operation, so there’s a lot of moving parts, but do I think that the instinct of the industry is to be on track and hit that deadline? Absolutely. And I see no evidence of anybody suggesting that that shouldn’t be the case.

H: Can I just ask you to answer, as briefly as you can, Nick Abano’s question, very simple, “Will the best advisors and fund managers charge a higher price”?

C: I think they may charge a higher price for a better service. It depends how you define best. I mean, best aren’t those that are working with those with the most money, it might be those offering the best value service to customers and therefore they may be very, very efficient at dealing with mass market customers and may be charging less. Just to say well the best advisors and fund managers will get away with charging the most, I think that’s just too linear

B: It’s a really difficult subject when you get into discussing the price of something, or value should I say, I think it’s about value. Does the investor who’s participating, who’s money it is, understand what they’re getting in exchange for the money and think that’s a good price compared with something else, and I think sometimes some of the messages from the regulator are over-simplistic purely around price and I always think people do value advice. They’ve got to be clear in what they’re getting for it and what they’re paying for it, and then allow the market to decide. I think the first debate - and you can ignore me, you can see there’s a lot of execution in any market - the first debate is, we’ve got to go out with x or y. I’m not sure that’s true, otherwise we’d all buy the cheapest car, we’d always go for the cheapest solution and that’s not what people do. I think that they want a choice

C: I think what you’re clearly going for is sales skills are vitally important, but what’s being sold is advice not products or funds. Advisors just need to get very, very good at what selling the value of what they do in advising, not the value of the products they’re arranging for the customer.

A: That’s the only value you can charge at a higher price!

B: People are used to that concept. People have used lawyers, or they use accountants there’s other professional services that people buy into and when people buy tangible products, as I say the iPhone isn’t the cheapest phone on the market, but you walk around the High St these days and people have got one. There’s a reason for that, people are thinking I’m prepared to pay a bit more because I’m getting something great in exchange

H: That’s true. We’re going to have to draw to a close in a second, but I just want to finish the debate with asking each of you, we’ve talked a lot about recommendations, we’re in the middle of a consultation process but they’re going to turn into rules. What do you think is going to change between now and the implantation or the establishment of the rules?

B: Well, first of all I would say that I think the regulator has genuinely entered into a dialogue with the industry over 6 months. I think that really has been a real positive move for the industry as a whole. I think there’s been a genuine conversation and we welcome that, we’ve been pleased about that. My hope is, that we make a bit of progress around this challenge of the rebate into the cash account. I do fear that that will spoil some of the benefits that are to be yielded from RDR, but that’s a hope rather than an expectation.

H: Hugo?

A: I have to echo that, it’s the only thing I’m really focused on, which is a reverse in that decision to ban cash rebates, I think it’s going to cause dramatically more detriment than the corresponding benefit. In fact, I can’t see any corresponding benefit, that’s the whole point.

C: To get away with what I hope might change, what I think might change… I’m not confident we’ll see a lot of change of key policy areas. The history of the RDR to date has shown changes from discussion documents to consultation, but from consultation to policy, it’s normally tweaks around the edges. I’m not saying that’s what I hope might happen, but it’s certainly what…I wouldn’t be surprised if we get pretty much what we see today.